Industry trends: Expansion in a Contracting Market

by 23 Nov 2011
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Where did we come from?  Why are we here?  And where are we going?  These questions have haunted mankind from our earliest days.

And since this isn’t an article for Christian Business Daily, I’m afraid we’re going to have to remain haunted about the first two questions for a bit longer, because we’re not answering those today.  What we are going to talk about, though, is where we’re going. 

Despite the apparent wishes of the federal government, we are not going to Hell.  And we are not going away.  So that’s two possibilities down.  There can’t be too many more, right?

Au contraire.  There are literally thousands of possible paths for the industry to go down, and sorting out which ones are likely and which not is not just an esoteric exercise, not a barbershop argument without consequence.  If you can see where things are headed, and get there first, when the wave reaches you, you end up riding the crest.  That’s a good place to be.

Herewith, then, what seem to me to be four likely roads down which the great eighteen-wheeler of mortgagedom is headed:

  1. More regulation.  Count with me now.  HERA, HVCC, Appraiser Independence, HMDA, GFE, TIL, NMLS, UAD modified, CFPB, Fed, HUD, FHA, VA, FNMA, FHLMC, FHFA, OFHEO…and those were only the ones I could remember off the top of my head that had been instituted or reformed or created or given new regulatory oversight of the mortgage industry in the last 5 years.  Around here, we started saying the pendulum had swung too far on regulation… back in 2007.  So let’s just realize the string on that pendulum has snapped and we’re headed toward increasing regulation for the remainder of our lives.  It will be much simpler.Seriously, there is one thing that makes increasing regulation all but certain, and that’s the creation of the Consumer Financial Protection Bureau.  I suppose it could be defunded in the austerity packages that are definitely coming to a government near you, but it seems unlikely.  One does not create a huge new federal agency and then give it no work to do.  Since the work of these agencies is regulation, expect a blizzard of it.  It’s how salaries are justified and budgets procured.
  2. Rate volatility.  Time was, mortgage rates hung out for months in narrow ranges; now it is not even unheard of for rates to change .25 percent in a day.  This isn’t a temporary trend.  We have several powerful forces working in various directions on mortgage rates, and they cannot all be reconciled.  The tension between massive government printing of money – which means inflation – and extreme economic fragility – which means “flight to quality”, or in other words, “buy bonds”, is increasingly unstable.  As I write this, economic fragility is winning, and rates are at ridiculous (and unsustainable) levels.  But the minute it looks like there is any sort of economic recovery, anywhere in the world, inflation will be ascendant and rates will explode to the upside, all Fed intervention notwithstanding.  Be prepared.
  3. Corporate contraction.  Over the past few years we’ve seen the exit of more than 75% of the mortgage lenders, wholesale banks, brokers, and loan originators from the market.  One of my favorite measurements of the diversity in the industry is the size of mortgage magazines.  Using just one that shall go nameless, in June 2006 it was a small book of 144 pages.  The last one I got had 24.  Since, in general, ad revenue is what determines magazine length, that tells me there has been a huge disappearance of advertisers, not that I couldn’t tell that just from my own experience.This is linked to #1 above.  Regulation is a tax.  It is an increase in the cost of doing business.  The more taxes rise, the more regulation there is, the more it costs to have the necessary people to perform the paperwork.  The more those costs rise, the harder it is for the small player to afford to continue, and the more small players will look for behemoths to ally themselves with.  Once I was a single-originator brokerage, with 30 broker channels for my loans.  That’s essentially impossible now.  So right along with increasing regulation you get increasing contraction in the industry.  Innovation is where you get small players taking on the big boys, but since product innovation is difficult in a regulated environment, and since this is a spectacularly regulated environment, expect the Bank of Americas to get bigger, and Joe’s Mortgage to join or die.  Of all my forecasts, this one hurts me the most.
  4. Service distance/degradation.  Increasing costs from regulation, increasing contraction in the industry means decreasing profits and more people doing more work in less time.  It means call centers in India.  It means a declining level of service and personal attention from originators, processors, servicers, underwriters, correspondents, banks, you name it.  Large corporations are famous for their inattention to detail and crappy service, and more large corporations is exactly what we have now, and are getting more of.  You can feel it already.  It’s going to get worse.  The economics demand it.


  1. Mounds of spam.  This is a connect-the-dots, so stay with me.  The latest figures showed home purchases had declined to 15-year lows.  We’re talking about loan volume now not seen since the 1990s.  As the pie shrinks, the squabbling over the remaining pieces grows.  Rates are low and the refinancing cannot go on forever.  Large companies will spend their money going after the shrinking pool of borrowers, and they’ll do it the way they always do it – by spamming everything in creation.  More junk mail, more email, more billboards, more TV, more radio.  More noise.  Hey, it’s what they do.

Now, these are fairly pessimistic forecasts, all taken together, and I wouldn’t blame you for thinking that perhaps it might be time to start doing iPhone apps for a living instead.  But don’t do that.  The Niche Report caters to a particular, entrepreneurial, even edgy segment of the industry, and it would surprise me if this segment would take the above lying down.  Fighting the government having proved largely ineffective at this point, and global macroeconomic trends being essentially unaffected by our prayers for relief, it falls to us not to alter the above, but to capitalize on it.  How, you ask?  Well.  Good question.  And your answers will be better than mine, but I have some.

First, how do you capitalize on an increasingly regulatory environment?  You get specialized.  Good loan originators do not do well when encompassed about by legions of red-tape spewing bureaucrats, so pull a fast one and have someone else stand there to do battle with the Minions of Evil.  Instead of trying to do it all yourself, get someone else to handle the mundanities of HVCC compliance and NMLS registrations.  You go sell loans.  Frankly, I’ll be shocked if there aren’t startups already advertising a-la-carte compliance and regulatory monitoring for small broker shops.  Seems an idea whose time might have come.

What about rate volatility?  Dealing with that is actually not that hard.  There are even some very interesting marketing opportunities available here.  You’re certainly familiar with the companies that make their money transmitting rate forecasts and market statistics to loan officers and originators.  Where are the companies that are delivering that content to borrowers?  I mean, besides us, doing it onesy-twosy.  You know what volatility means to a borrower?  Stark, naked terror.  They not only can’t do anything about the market as a whole, they don’t even know how to interpret what’s happening.  Don’t let your people get that info from MSNBC.  Give it to them yourself.  Understand it, know it, and deliver it.  There are opportunities there.

Corporate contraction?  Well, there’s power in numbers and great wealth, and those boys have that in abundance.  Do your homework and find companies that have the broadest reach but offer the most flexibility to you, giving you the best of both worlds.  Contraction, though, also means departing loan officers and diminishing competition.  There are millions of people out there – actually millions – whose old loan officer is now working at WalMart.  When the industry contracts, it leaves huge amounts of market share for the vigilant and the aggressive.  Now is the time to gain it, and there will continue to be those opportunities for the foreseeable future. 

I probably should add a word here about recruiting as well.  It isn’t just loan officers that are leaving the industry; mortgage companies are doing that, too, and in some cases they’re leaving their loan officers high and dry, with no place to go.  There are significant opportunities out there for companies that are good at attracting quality people.  Expansion in a contracting market?  Why not?

The antidote for crappy service and spam is the most obvious of all.  If the industry as a whole is moving to antiseptic, cookie-cutter communication and one-size-fits-all loan programs, there will be great opportunities to stand out from the crowd.  If the industry moves away, you close in.  Move into closer proximity to your clients and potential borrowers.

Don’t chase deals; create them.  Instead of shouting marketing slogans at people who search “mortgage rates” on Google, work with people that aren’t even looking for a loan yet.  Teach them, educate them, provide them value and information about the process and the market.  This seems to me to be perhaps the greatest opportunity, the largest and most underserved market in the mortgage world – the tens of millions of people that should want to move, to buy, to restructure their finances, but who don’t know it because they don’t have the information to know what they want.  McDonalds doesn’t wait for you to decide you’re hungry, they show you the food so that you will be.  Go, and do thou likewise.  People still love buying houses; they just don’t know how, and they’re scared.  This is a problem we can fix.

So despite the early tone of this article, despite my pessimistic forecasts for the direction of the industry, I actually think there’s never been a better time to be in the business.  I’m feeling more positive about what I can do to create great value for my clients than I ever have.  Hey, back when anyone could get a loan any time they wanted, who needed us?  But now, now they need a professional.  Professional is what we are.  We’re good at this.  And the time has never been better for us to prove it.

Chris Jones, branch manager with City First Mortgage Services, is a nine-year industry professional in brokering and banking, with a background in financial services, national politics and Main Street entrepreneurialism. He is the author of the forthcoming book The Six Channels of Marketing, available in January.  Chris lives in Lehi, Utah, with his wife, Jeanette, and their eight children, and can be found at, [email protected] or (801) 850-3781.

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